December 11, 2012 in GMI Press Releases
New York – December 11, 2012 — GMI Ratings, the leading provider of research on environmental, social, governance (ESG) and accounting-related risks affecting the performance of public companies, released today the results of a study assessing the risk characteristics of major market indices based on ESG and forensic accounting criteria.
Focusing on Nasdaq 100, S&P 500, FTSE 100 and MSCI World indices, the study compared the distribution of ESG and forensic accounting (AGR®) risk ratings for companies in these indices with the normal (expected) distribution of scores in the same region. The study found that the distribution of ESG and AGR risk in these indices varies materially from the normative risk distribution in the broader universe of stocks.
James A. Kaplan, GMI Ratings chief executive, said: “These findings shed new light on the implications of an investment manager’s decision to benchmark portfolio performance against a major market index. Institutional investors typically use index benchmarks as a way to measure their contribution to performance. However, our findings suggest that widely followed indices such as S&P 500 can also expose investors to above-normal concentrations of ESG and accounting risk.”
Kaplan added: “Beyond quantifying the risk characteristics of these indices, this research has a larger significance in the evolution of extra-financial research. So far, the financial community has mainly started to apply extra-financial research to the analysis of individual stocks. The findings below point to the importance of applying these novel measures more broadly – not only to indices but also to asset classes and industry groups.
Key Findings: ESG Risk
Twenty-five percent of companies in the Nasdaq 100 index – and 40% of S&P 500 companies — have lowest-quintile ESG ratings, compared to 20% for the normative distribution. By contrast, companies with top-quintile ESG ratings are under-represented in these indices.
Twenty-eight percent of companies in the MSCI World Index have lowest-quintile ESG ratings, compared to 20% for the normative distribution. Companies with top-quintile ESG ratings are under-represented in MSCI World, but by a narrower margin (18% vs. 20%).
In the FTSE 100 index, the study found a much more favorable distribution of ESG risk compared to the normative set. Companies with lowest-quintile ESG ratings only account for 3% of FTSE 100 – 17% below the norm. By contrast, companies with top-quintile ESG ratings are widely over-represented in FTSE 100 (55% vs. 20%).
Key Findings: Accounting (AGR®) Risk
Thirty-six percent of companies in the Nasdaq 100 index – and 30% of S&P 500 companies — have lowest-quintile AGR ratings, compared to 20% for the normative distribution. By contrast, companies with top-quintile AGR ratings are under-represented in these indices.
Twenty-three percent of companies in the MSCI World Index have lowest-quintile AGR ratings, slightly above the normative distribution. Companies with top-quintile AGR ratings are under-represented in MSCI World by approximately 6%.
In the FTSE 100 index, the study found a slightly more favorable distribution of AGR risk compared to the normative set. The favorable variance is much less pronounced compared to FTSE 100’s ESG risk characteristics.
Kaplan concluded: “These are important findings, in our view, that point toward new applications of extra-financial research to the practical concerns of mainstream institutional investors. Just as it adds depth to issuer-specific analysis, extra-financial research yields insights into investment risk on a broader scale – across indices, industries, regions. Whatever the purview of investment analysis, it remains clear that novel measures of risk and value are steering decision-makers toward a fuller understanding of the changing character of capital markets.”